assign 4

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Week_4_Assignment_CASE_6B.pdf

ch. 6.pdf

ch. 7.pdf


In this case, you have been provided financial information about the company in order to create a cash budget.  Management is seeking advice or clarification on three main assumptions the company has been operating.  Address Questions 1 and 2 at the end of the case.  Based on the case questions, you are required to provide a two to four double-spaced written report providing the necessary advice and explanations to management.  The written report should be properly formatted according to APA guidelines and demonstrate research and critical thinking skills.  Conclusions and recommendations should be supported by at least 2 scholarly sources from the Ashford Library or other external sources, excluding the textbook.  

Address Question 1 by using a spreadsheet to prepare the case budget for the fourth quarter.  The cash budget should be included as an appendix to the written report and should be referenced in the written report.

Address Question 2 in a fully developed explanation of two to four double spaced pages to present the findings and explain or validate the assumptions stated in item (a) through (c).  In addressing Question 2, be sure to use the cash budget prepared in Question 1 as support for your explanation.  The written analysis should be supported by at least two scholarly sources, excluding the textbook.

Week 4 Written Assignment should:

  • Demonstrate graduate level work including appropriate research and critical thinking skills.
  • Be presented as a written analysis (not a question/answer format).
  • Incorporate case questions into the overall analysis.
  • Follow APA formatting guidelines including title page, reference page and in-text citations.
  • Consists of two to four double-spaced pages of content.
  • Provide at least two scholarly sources, excluding the textbook.

Unformatted Attachment Preview

CASE 6B – CHESTER & WAYNE Chester & Wayne is a regional food distribution company. Mr. Chester, CEO, has asked your assistance in preparing cash-flow information for the last three months of this year. Selected accounts from an interim balance sheet dated September 30, have the following balances: Cash Marketable securities Accounts receivable Inventories $142,100 200,000 $1,012,500 150,388 Accounts payable Other payables $354,155 53,200 Mr. Wayne, CFO, provides you with the following information based on experience and management policy. All sales are credit sales and are billed the last day of the month of sale. Customers paying within 10 days of the billing date may take a 2 percent cash discount. Forty percent of the sales is paid within the discount period in the month following billing. An additional 25 percent pays in the same month but does not receive the cash discount. Thirty percent is collected in the second month after billing; the remainder is uncollectible. Additional cash of $24,000 is expected in October from renting unused warehouse space. Sixty percent of all purchases, selling and administrative expenses, and advertising expenses is paid in the month incurred. The remainder is paid in the following month. Ending inventory is set at 25 percent of the next month's budgeted cost of goods sold. The company's gross profit averages 30 percent of sales for the month. Selling and administrative expenses follow the formula of 5 percent of the current month's sales plus $75,000, which includes depreciation of $5,000. Advertising expenses are budgeted at 3 percent of sales. Actual and budgeted sales information is as follows: Actual: August September $750,000 787,500 Budgeted: October November December January $826,800 868,200 911,600 930,000 The company will acquire equipment costing $250,000 cash in November. Dividends of $45,000 will be paid in December. The company would like to maintain a minimum cash balance at the end of each month of $120,000. Any excess amounts go first to repayment of short-term borrowings and then to investment in marketable securities. When cash is needed to reach the minimum balance, the company policy is to sell marketable securities before borrowing. The company will acquire equipment costing $250,000 cash in November. Dividends of $45,000 will be paid in December. The company would like to maintain a minimum cash balance at the end of each month of $120,000. Any excess amounts go first to repayment of short-term borrowings and then to investment in marketable securities. When cash is needed to reach the minimum balance, the company policy is to sell marketable securities before borrowing. Questions (use of spreadsheet software is recommended): 1. Prepare a cash budget for each month of the fourth quarter and for the quarter in total. Prepare supporting schedules as needed. (Round all budget schedule amounts to the nearest dollar.) 2. You meet with Mr. Chester and Mr. Wayne to present your findings and happen to bring along your PC with the budget model software. They are worried about your findings in Part 1. They have obviously been arguing over certain assumptions you were given. a. Mr. Wayne thinks that the gross margin may shrink to 27.5 percent because of higher purchase prices. He is concerned about what impact this will have on borrowings. Comment. b. Mr. Chester thinks that "stock outs" occur too frequently and wants to see the impact of increasing inventory levels to 30 and 40 percent of next quarter's sales on their total investment. Comment on these changes. c. Mr. Wayne wants to discontinue the cash discount for prompt payment. He thinks that maybe collections of an additional 20 percent of sales will be delayed from the month of billing to the next month. Mr. Chester says "That's ridiculous! We should increase the discount to 3 percent. Twenty percent more would be collected in the current month to get the higher discount." Comment on the cashflow impacts. chapter 6 Budgeting for Operations Management Javier Larrea/age footstock/SuperStock Learning Objectives After studying Chapter 6, you will be able to: sch80342_06_c06_223-278.indd 223 • Identify the major elements of a financial planning and control system. • Explain the major purposes of budgeting. • Define responsibility accounting, including cost, profit, and investment centers. • Understand the role of flexible budgeting in planning and control. • Identify the major human behavior factors that affect budgets and the budgeting process. • Identify independent and dependent budget variables. • Understand the basic format and calculation sequences necessary for preparation of budgets and supporting schedules. • Prepare and format schedules for all elements of the master budget. 12/20/12 11:53 AM Chapter Outline CHAPTER 6 Chapter Outline 6.1 Budgeting: A Planning and Control System 6.2 Responsibility Accounting Responsibility Centers Identifying Cost Centers Control Reports and Roll-Up Reporting 6.3 Why Budget? 6.4 Behavioral Side of Budgeting Top-Management Support Budget Slack Human Factors and Budget Stress Ethics of Budgeting 6.5 Master Budget – An Overview Master Budget Components Master Budget for Nonmanufacturing Organizations 6.6 The Starting Point and Beyond Finding the Controlling Constraint Sales Forecasting Using Activity-Based Costing Relationships Independent and Dependent Variables Preparing and Formatting Budget Schedules 6.7 Other Budgeting Techniques Flexible Budgeting Project Budgeting Probabilistic Budgeting 6.8 A Master Budget Example Annual Goals and Planning Assumptions Sales Forecast Production Plan Supporting Schedules Cost of Products Manufactured and Sold Schedule Selling and Administrative Expense Budgets Project Budgets Cash-Flow Forecasts 6.9 Impacts of New Manufacturing Approaches sch80342_06_c06_223-278.indd 224 12/20/12 11:53 AM CHAPTER 6 Chapter Outline Budgeting: The Negatives and the Positives! If you mention the words “plans” or “budgets” to Ann Davis, president of Internet Pathways, you get a reaction ranging from disdain to outright hostility. She has been heard to say: “How can I plan? Things always change so fast!” “My business isn’t suited to anything so formal. My managers and I need to be flexible, fast on our feet, and ready to change direction overnight, if we have to do so.” “The budget always says we can’t do it. I just say, ‘Do it!’” “The budget reports tell me where I’ve been, never where I’m going.” “That’s the accountant’s budget; it doesn’t tell me what my problems are and what to do about them!” “We can’t wait for approvals and reports. Budgets hold us back!” Ann even has a coffee cup with “Budgets Are For Wimps!” printed on it. She believes that intuition and drive, not reports, got the company to where it is today. “The easiest way to lose our edge is to start acting like paper shufflers!” she exclaims. Each of her comments has some truth in it; however, the comments together reflect serious deficiencies in the firm’s management process—little or no planning, and little ability to measure performance. A close friend says plans and budgets strike terror in Ann because her “style” is threatened. She likes to operate quickly, often keeping others in the dark. The friend says that she’s afraid to admit that she has little idea where the company is going. Recently, a situation arose in which Ann thought employees were making too many “bad calls” on key decisions. She was surprised by the responses she got when she asked several department managers what was wrong. Each complained about lack of direction at the top, how management kept changing its mind, that there was no plan of action, and how employees felt they could not judge how each of them, and the company as a whole, was progressing. sch80342_06_c06_223-278.indd 225 12/20/12 11:53 AM CHAPTER 6 Section 6.1 Budgeting: A Planning and Control System Introduction A simple concept is a key to budgeting: Planning is not deciding what to do in the future; it is deciding what to do now to assure a future. This chapter discusses concepts, tools, and processes used in a planning and control system and illustrates an integrated master budget. 6.1 Budgeting: A Planning and Control System P lanning and control comprise an overall management system. Planning can be viewed as a framework within which managers anticipate future events, develop a plan of action, and estimate future revenues and costs. Control is the process of using feedback on actual operating results to compare to the plan, to evaluate performance in achieving the plans and goals, and to make changes. A budget is a plan showing what and how resources are to be used over a specified time period. A plan, act, control, and evaluate cycle is shown in Figure 6.1. The master plan is prepared, decisions are made and actions taken, reports are prepared and analyzed, and the plan is reviewed and updated. Figure 6.1: The planning and control cycle Prepare the Master Plan Plan Review and Update Plan Evaluate Act Record Transactions Control Report on Actual vs. Plan A mission statement sets the purpose of the organization. Goals and objectives are statements about its future position and its long-term direction. They describe specific performance targets within certain timeframes. A profit goal might be, for example, to earn an annual 15 percent aftertax return on shareholders’ equity or to generate sales of $1 sch80342_06_c06_223-278.indd 226 12/20/12 11:53 AM Section 6.2 Responsibility Accounting CHAPTER 6 billion by 2016. Once goals (direction and motivations) and objectives (quantified performance targets) are set, action plans can be defined. The budgeting process determines the inputs needed to achieve the forecast outputs. A planning and control system includes tools, methods, and attitudes. The following set of common elements appears: • • • • • • • Strategic planning process. This long-range planning effort defines the firm’s mission (why the firm exists), the long-range goals (what level of achievement it expects), and a strategic plan (what markets, price policies, resource needs, and production capabilities the firm will have). Business plan and personal goal setting. Creating the annual business plan is the task of evaluating the firm’s strengths, weaknesses, opportunities, and tactics to build firm-wide priorities for the coming year. Also, each manager develops a personal set of goals and a plan of achievements that are consistent with the firm’s business plan. Planning process and timetable. A budgeting schedule includes when to start the process, submit budgets, and review and approve budgets at various management levels—who does what and when. Responsibility accounting system. This is a planning and control system that combines responsibility centers, control reports, and cost drivers. Reward or incentive system. Rewards can provide incentives for managers who achieve their unit’s budget goals and/or MBO targets. Tying performance to compensation appears to be an increasingly common practice. Financial modeling. Ability to evaluate alternative or “what if” scenarios is now an expected part of any financial planning system. Simulation can test a plan to assess goal achievement and evaluate alternative actions. Participatory budgeting. It is assumed that every manager in the firm is involved in planning and control. Often, budget objectives are set at the executive level, but budgets are constructed from the bottom up—sometimes called “grass roots” budgeting. A budget period may be a week, month, quarter, year, or longer. But normally, a master budget is for a year’s activities and is divided into months or quarters. Long-term budgets may be for five or more years. 6.2 Responsibility Accounting R esponsibility accounting has no universal definition but does link authority and control. A key aspect of responsibility accounting is that managers prepare plans for their areas of responsibility and exert control over those activities by making decisions and evaluating results. A responsibility accounting system brings discipline to planning and control tasks. The same basic elements remain visible in the accounting systems of small firms as in the sophisticated planning systems of large, complex organizations. The basic elements of responsibility accounting are: sch80342_06_c06_223-278.indd 227 12/20/12 11:53 AM CHAPTER 6 Section 6.2 Responsibility Accounting • • • Responsibility center designations – to segment the organization into small sets of similar activities. Control reports – to compare actual versus plan for expenses, revenues, and other financial and activity measures, such as cost drivers. Roll-up reporting capability – to summarize lower level activities at higher levels along responsibility channels. Strictly speaking, managers put more effort towards managing people who incur costs rather than actually controlling costs themselves. Controllable costs are tied to organizational structure, activities management, and performance assessment. Responsibility Centers From a firm’s perspective, planning and control focus on responsibility centers. A responsibility center is an organizational unit that has a specific manager with authority and control over spending, earning, or investing. Responsibility centers can be subdivided into three groups: cost centers, profit centers, and investment centers. Figure 6.2 illustrates these responsibility centers. Figure 6.2: Responsibility centers: investment, profit, and cost centers President 1000 Vice President Group A 2000 Vice President Group B 3000 Vice President Group C 4000 Investment Centers Director Division 1 3100 Director Division 2 Director Division 3 3300 Profit Centers Manager Accounting 3220 Manager Manufacturing 3240 Manager Sales 3260 3200 Cost or Activity Centers Supervisor Stamping sch80342_06_c06_223-278.indd 228 3242 Supervisor Assembly 3244 Supervisor Logistics 3246 Handling Activity 3247 Shipping Activity 3248 More Cost or Activity Centers (as needed) 12/20/12 11:53 AM Section 6.2 Responsibility Accounting CHAPTER 6 A cost center is a responsibility center where control exists over incurring costs. Often, cost centers are defined by an organization chart and may be further subdivided into more cost centers if costs and activities can be better linked for cost determination and management purposes. A cost center is the smallest unit of an organization within which costs and activities are measured. Activity centers, discussed in Chapter 5, are like cost centers. A profit center is a responsibility center where control exists over generating revenue and incurring its related costs. Often, sales organizations are profit centers—with product revenues, cost of sales, and marketing expenses. Managers with product-line responsibility might include both manufacturing and marketing departments. Branch or regional managers often have sales and expense control. The term revenue center can be used where a manager has revenue responsibility but controls few expenses, such as in a regional sales office. An investment center is a responsibility center where control exists over costs, revenues, and investments in assets used or managed. Managers must have the authority to acquire or dispose of assets. Typically, divisions of large firms are considered to be investment centers and are viewed by top management essentially as separate business entities. Identifying Cost Centers In many cases, cost centers parallel the boxes on the organization chart. Figure 6.2 illustrates the link between a firm’s organization and its cost center coding. Activity groupings should be studied before cost centers are defined. Logical groupings are often created by a numbering system—defining different parts of the organization, levels of management, and superior/subordinates links. For example, the first digit indicates a group; the second, a division; the third, a functional area; and the last digit provides even greater detail if needed. Design of the cost system is critical. If activities are segmented too finely, too many cost centers are created, and key cost information is subdivided too finely. However, data aggregation and summarization start here, and a greater danger is losing important cost relationships if cost and activity detail are too summarized. Cost centers defined too broadly lose detail needed in later analyses, and this detail can be recreated only at great cost. sch80342_06_c06_223-278.indd 229 12/20/12 11:53 AM Section 6.2 Responsibility Accounting CHAPTER 6 Contemporary Practice 6.1 Different Organizations and Adjusting the Accounting Planning and Control System Traditionally, organizations have been structured around a functional organizational chart: operations, marketing, accounting, human resources, and research and development. As companies grow, they frequently move to a divisional structure, organized around product lines, world geography, or different customer groupings. Functional activities are part of each division. To gain efficiencies, a hybrid structure evolves where certain activities are centralized at corporate levels (e.g., finance and R & D) and others are decentralized within divisional groups (e.g., marketing and after-market customer service). Matrix organizations evolve to combine the advantages of both functional and divisional organizations. Marketing may be done at the divisional level but coordinated across all divisions by a corporate marketing function. Now, in specific situations, a manager has both functional and divisional responsibility. The accounting system must be designed to provide relevant information from both perspectives to make good choices at that decision point, consistent with corporate goals. Accountants must “go back to the drawing board” as we seek to design accounting planning and control systems to serve new organizational approaches (Ritson, 2000). Control Reports and Roll-Up Reporting Control reports are prepared routinely for each cost center for a specific time period. Figure 6.3 is a cost center report from a metal-forming factory. This is from Cost Center 3242 in Figure 6.2 and uses an account numbering system set up to detail the types of costs that will be tracked. This factory has nearly 40 cost centers and uses approximately four hundred different expense accounts. Several points should be made about the control report in Figure 6.3. The breakdown among controllable, semicontrollable, and allocated expenses is an excellent approach to signal which costs and variances are the responsibility of that cost center’s manager. Monthly and year-to-date comparisons of actual to budget costs report the current situation, annual trends, and magnitude and direction of variances from budget. Activity measures, including cost drivers that relate overhead costs to outputs, are reported at the bottom of the report. sch80342_06_c06_223-278.indd 230 12/20/12 11:53 AM CHAPTER 6 Section 6.2 Responsibility Accounting Figure 6.3: Example of a cost center control report Cost Center: Stamping Period: Cost Center No.: 3242 Supervisor: Tatso Kannisoni Year-to-Date Monthly Actual September Budget Fav./ (Unfav.) Actual Budget Fav./ (Unfav.) 6110 Total direct labor 23465 24192 727 206211 209520 3309 6160 Total direct materials 79560 80000 440 712344 715000 2656 6211 Machine setup 3703 3424 (279) 29920 30608 688 6212 Downtime 1076 1680 604 13357 13286 (71) 6215 Maintenance labor 430 639 209 4205 3016 (1189) 6245 Hourly overtime premium 761 0 (761) 3094 0 (3094) 6271 Hourly fringe benefits 11222 12000 778 106112 1 ...
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